PagerDuty(US:PD)2024-03-15 21:20Part I Business PagerDuty provides a digital operations management platform, generating $430.7 million in FY2024 revenue through a subscription-based, land-and-expand model Fiscal Year 2024 vs 2023 Financial Highlights | Metric | FY 2024 | FY 2023 | | :--- | :--- | :--- | | Revenue | $430.7 million | $370.8 million | | Net Loss | ($75.2 million) | ($128.4 million) | - The company's business model is centered on a "land-and-expand" strategy, initially attracting users through viral adoption and then expanding usage to more users, new use cases, and additional products within an organization, with a particular focus on enterprise customers25 - PagerDuty's platform has an ecosystem of over 700 direct integrations with technologies like AWS, Datadog, Splunk, Salesforce, and Slack, enabling it to collect and correlate digital signals from a wide range of systems2430 - International operations are a key growth area, generating 28% of revenue in fiscal year 202438 Our Platform and Key Customer Benefits The PagerDuty Operations Cloud is a multi-product platform for real-time digital operations management, leveraging extensive data and integrations - The platform is built for real-time operations, managing complex, hybrid cloud environments to resolve incidents in seconds or minutes, not hours or days2728 - PagerDuty has a rich repository of machine-generated and human response data from over 15,000 paying customers, which powers its advanced machine-learning capabilities30 - The platform's products include Incident Management, AIOps for noise reduction, Process Automation for orchestrating workflows, and Customer Service Operations to manage customer-impacting issues33 Our Growth Strategies The company's growth strategy focuses on acquiring new customers, expanding existing accounts, introducing new products, and growing its international presence - Key growth pillars include landing new customers, expanding within the existing base, introducing new products, growing internationally, and penetrating the U.S. Public Sector3338 - International revenue constituted 28% of total revenue for the fiscal year ended January 31, 2024, with plans to further expand in EMEA, Asia Pacific, and Japan38 - The company is targeting the U.S. Public Sector, having achieved "In Process" status within the Federal Risk and Authorization Management Program (FedRAMP®) in August 202338 Competition PagerDuty faces competition from established software vendors, in-house solutions, and open-source software in the digital operations management market - Direct competitors include established software providers such as Atlassian, Splunk, Red Hat, Everbridge, and ServiceNow46 - Competition also comes from homegrown/in-house solutions and open-source software4694 - Competitive factors include total cost of ownership, product functionality, breadth of offerings, security, flexibility, and performance; PagerDuty faces pricing pressure from larger competitors bundling services48 Human Capital The company employed 1,182 people globally as of January 31, 2024, emphasizing a culture of innovation, diversity, and employee development - The company employed 1,182 people as of January 31, 2024, with a global distribution of 59% in the U.S. and 41% in international locations55 - PagerDuty's ID&E mission is to unlock the potential of every employee through systematic improvements and programmatic engagement, fostering a sense of belonging56 - The company uses quarterly engagement surveys to gather employee feedback and equips leaders with coaching and training to support career development61 Global Impact and Environmental, Social and Governance Initiatives PagerDuty directs its social impact through PagerDuty.org and has developed climate reduction targets aligned with the Paris Agreement - PagerDuty is a member of Pledge 1%, committing 1% of equity, product, and employee time to community impact63 - In FY24, the PagerDuty.org Fund deployed approximately $1.3 million to organizations focused on time-critical health and climate issues63 - The company has developed climate reduction targets aligned with the Paris Agreement and submitted a letter of intent to the Science Based Targets Initiative (SBTi)66 Risk Factors The company faces significant risks from economic conditions, operating losses, market competition, cybersecurity threats, and regulatory compliance Risks Related to Our Business and Industry Key business risks include a history of operating losses, high dependency on a single product, and intense market competition - The company has a history of operating losses, reporting a net loss of $75.2 million for FY2024 and an accumulated deficit of $552.4 million as of January 31, 202474 - A significant majority of revenue is derived from a single product, the incident management offering, making the company vulnerable to declines in demand or competitive pressure for this product88 - The market is highly competitive, with competition from in-house solutions, open-source software, and established providers like ServiceNow, Atlassian, and Splunk89 Risks Related to Technology, Security, and Operations Operational risks stem from potential cyber-attacks, reliance on third-party cloud providers like AWS, and the need to maintain platform integrations - The business faces threats from cyber-attacks, including malware, ransomware, and phishing, which could compromise sensitive customer data and lead to significant costs and reputational damage120121 - The company relies on third-party cloud providers, primarily AWS, for hosting its services; any interruptions or performance issues from these providers could damage customer relationships and reduce revenue137 - The platform's functionality depends on its ability to integrate with a wide range of third-party applications; changes by these third parties could restrict access or functionality, negatively impacting the business140 Risks Related to Legal, Regulatory, and Compliance The company is subject to evolving global data privacy laws, anti-corruption regulations, and increased scrutiny of AI technologies - The company is subject to numerous data privacy and security laws, including the EU GDPR and California's CCPA/CPRA, with non-compliance potentially leading to significant fines (up to 4% of annual global revenue under GDPR)178180183 - The use of AI and ML technologies in products is subject to increasing regulation and scrutiny, which could lead to additional compliance costs or restrict the use of these technologies186 - The business is subject to U.S. and foreign anti-corruption laws (e.g., FCPA), export controls, and economic sanctions, which can impair the ability to compete in international markets174205 Risks Related to Financial Operations and Debt Financial risks include servicing its convertible senior notes, potential repurchase obligations, and counterparty risk from capped call transactions - The company has outstanding convertible senior notes due in 2025 ($57.5M principal) and 2028 ($402.5M principal); servicing this debt depends on future performance and cash flow, which may be insufficient210 - Holders of the notes can require repurchase upon a "fundamental change," and the company may not have enough available cash or be able to obtain financing to meet this obligation212 - In connection with the notes, the company entered into capped call transactions to reduce potential dilution and is subject to counterparty risk if the financial institutions involved default on their obligations216220 Risks Related to Ownership of Our Common Stock Stock ownership risks include high price volatility, concentrated ownership, and the absence of dividend payments - The stock price is subject to high volatility due to factors like fluctuations in operating results, analyst expectations, and general market conditions228 - Ownership is significantly concentrated among executive officers, directors, and principal stockholders, allowing them to influence all matters requiring stockholder approval239 - The company has never paid cash dividends and does not intend to in the foreseeable future, meaning returns on investment depend solely on stock price appreciation237 Cybersecurity The company's cybersecurity program is managed by senior leadership and overseen by the board's audit committee to mitigate threats - The company's cybersecurity program is managed by the CISO, CTO, and CIO, who are responsible for identifying, assessing, and managing threats to critical systems and data255262 - The board of directors' audit committee is responsible for overseeing the cybersecurity risk management processes and receives periodic reports from management on significant threats and mitigation efforts261266 - Mitigation strategies include incident response procedures, vulnerability management, disaster recovery plans, encryption, network security controls, and a vendor risk management program256259 Properties PagerDuty's corporate headquarters is in San Francisco, supplemented by several other domestic and international office locations - The corporate headquarters is in San Francisco, CA, with a lease for 42,113 sq. ft. expiring in fiscal 2026267 - PagerDuty has additional international and domestic offices in Atlanta, Toronto, Santiago, London, Sydney, Lisbon, and Tokyo267 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities PagerDuty's common stock trades on the NYSE under the symbol "PD", and the company does not anticipate paying cash dividends - The company's common stock is listed on the NYSE under the symbol "PD"271 - PagerDuty has never paid cash dividends and does not expect to in the foreseeable future, intending to retain earnings for business investment273 Management's Discussion and Analysis of Financial Condition and Results of Operations FY2024 revenue grew 16% to $430.7 million with a 107% net retention rate, alongside an improved net loss and positive free cash flow Key Business Metrics (as of Jan 31) | Metric | 2024 | 2023 | | :--- | :--- | :--- | | Total Paying Customers | 15,039 | 15,244 | | Customers > $100k ARR | 804 | 752 | | Dollar-based Net Retention Rate | 107% | 120% | FY 2024 Financial Performance vs. FY 2023 | Metric | FY 2024 | FY 2023 | | :--- | :--- | :--- | | Revenue | $430.7M | $370.8M | | Gross Profit | $352.9M | $300.4M | | Gross Margin | 82% | 81% | | Loss from Operations | ($96.2M) | ($129.4M) | | Net Loss | ($77.4M) | ($129.2M) | | Net Cash from Operations | $72.0M | $17.0M | | Free Cash Flow | $64.4M | $8.5M | Results of Operations FY2024 revenue increased 16% to $430.7 million with an 82% gross margin, while loss from operations improved to $96.2 million - Revenue increased by $59.9 million (16%) in FY2024, attributed to growth from both new and existing customers through user expansion and upsells327 - Gross margin improved slightly to 82% in FY2024 from 81% in FY2023329 - General and administrative expenses increased by 13%, primarily due to an $8.4 million real estate impairment charge and higher personnel costs333 Liquidity and Capital Resources The company's liquidity is strong with $571.2 million in cash and investments, bolstered by positive operating cash flow of $72.0 million - The company held $571.2 million in cash, cash equivalents, and investments as of January 31, 2024351 - In October 2023, the company issued $402.5 million in new 2028 convertible notes, repurchased $230.0 million of its 2025 notes, and repurchased $50.0 million of common stock353354 Cash Flow Summary (Fiscal Year Ended Jan 31) | Metric | 2024 | 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $72.0 million | $17.0 million | | Net cash used in investing activities | ($30.5 million) | ($86.2 million) | | Net cash provided by (used in) financing activities | $51.6 million | ($6.4 million) | Quantitative and Qualitative Disclosures About Market Risk PagerDuty is primarily exposed to interest rate risk on its investments and foreign currency risk on its international operating expenses - The company's primary market risks are interest rate risk and foreign currency exchange risk381385 - Interest rate risk impacts the fair value of the company's $571.2 million in cash, cash equivalents, and investments, as well as the fair value of its convertible notes; a hypothetical 10% change in interest rates is not expected to have a material impact381384 - Foreign currency risk is mainly from operating expenses in countries like Canada, the UK, and Australia, as revenue is almost entirely denominated in U.S. dollars; a hypothetical 10% change in the U.S. dollar's value is not expected to have a material effect386 Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements and the independent auditor's report for fiscal year 2024 Consolidated Balance Sheet Highlights (as of Jan 31, 2024) | Category | Amount (in thousands) | | :--- | :--- | | Assets | | | Total Current Assets | $703,198 | | Total Assets | $925,306 | | Liabilities & Equity | | | Total Current Liabilities | $281,655 | | Convertible senior notes, net | $448,030 | | Total Liabilities | $746,413 | | Total Stockholders' Equity | $171,600 | Consolidated Statement of Operations (Year Ended Jan 31, 2024) | Line Item | Amount (in thousands) | | :--- | :--- | | Revenue | $430,699 | | Gross Profit | $352,867 | | Loss from Operations | ($96,246) | | Net Loss | ($77,367) | | Net Loss per Share | ($0.89) | Notes to Consolidated Financial Statements The notes detail accounting policies, the acquisition of Jeli, Inc., terms of convertible notes, and the amortization of deferred contract costs - On November 15, 2023, the company acquired Jeli, Inc. for a purchase consideration of $29.7 million, resulting in $18.5 million of goodwill and $6.9 million of intangible assets508510511 - The company defers and amortizes sales commissions over a period of four years; the balance of deferred contract costs was $44.6 million as of January 31, 2024446448 - As of January 31, 2024, the company had $57.5 million principal of 1.25% notes due 2025 and $402.5 million principal of 1.50% notes due 2028 outstanding507562 Controls and Procedures Management concluded that the company's disclosure controls, procedures, and internal control over financial reporting were effective as of January 31, 2024 - Management concluded that the company's disclosure controls and procedures were effective as of January 31, 2024613 - Management concluded that internal control over financial reporting was effective as of January 31, 2024; the evaluation excluded the internal controls of the recently acquired Jeli, Inc614615 Part III Directors, Executive Officers, Corporate Governance, Compensation, and Principal Accountant Fees Information regarding directors, executive compensation, and corporate governance is incorporated by reference from the 2024 Proxy Statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the forthcoming 2024 Proxy Statement622623624625626 Part IV Exhibits, Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Form 10-K report - This section contains the index to the Consolidated Financial Statements and lists all exhibits filed with the Form 10-K627629